We just switched our super to an SMSF. How should we invest it?

We’ve recently shifted our super to an SMSF as we wanted greater visibility on our investments. Our inclination is just to use ETFs to invest our money but is this too simplistic? We’re worried about blind spots, and there is some trepidation around investing such an important pool of money.

ETFs (Exchange-Traded Funds) are a type of index fund that is listed on a sharemarket. ETFs can provide a great way to achieve a diversified exposure to a given market or theme at a relatively low cost.

ETFs are seen as being more versatile than individual investments.Credit: Dionne Gain

When it comes to constructing the portfolio for your SMSF, I, of course, would recommend you obtain some professional help. But setting that aside for now, I think there are three elements that you need to work through.

First, how much risk do you want to take? This will depend on factors such as your age, retirement plans, past reactions to market downturns, and your broader financial picture and overall financial resilience.

The primary contributor to the performance of your SMSF portfolio will be the decisions you make around asset allocation, which is informed by your risk appetite. You might decide that you want to be quite aggressive with your investment allocation, and therefore have almost all the funds invested in growth assets – shares and property.

Alternatively, you might prefer more of a balanced approach, perhaps half the money in growth assets and half in conservative investments such as term deposits. The decision you make around the allocation of your SMSF holdings warrants deep reflection. It will have a huge impact on your ultimate retirement outcome.

If you end up with the bulk of your SMSF in a mix of ETFs, that wouldn’t ring any alarm bells for me.

The next question is whether index funds are the way to invest your money. Index funds replicate a given market. If you invest in a standard index fund covering the Australian sharemarket, for example, you will hold the top 200 listed companies in Australia, in accordance with their size (market weight).

This fund’s largest investment will be in CBA, then BHP, CSL, etc. If you bought an index fund covering the US market, your fund’s largest investment would be in Nvidia, then Apple, Microsoft, etc. Index funds also exist for assets such as bonds and listed property.

Standard index funds provide a great way to achieve a diversified portfolio at a low cost and remove the risk that your investment might underperform the market.

The alternative to indexing is to actively choose individual securities. Most research suggests even investment professionals struggle to do this successfully over a sustained period.

Once you have determined your asset allocation, and assuming you have decided that adopting an index approach is how you would like to invest your money, you can then decide whether an ETF is the best way to execute this. It is possible to invest directly into many index funds with the underlying manager, so the ETF version is not the only game in town.

There are many ETFs on the market, and it is important that you take the time to understand what you are buying. Fees vary considerably. You can get exposure to the US S&P500 index for 0.04 per cent in fees, which is extraordinary. But there are ETFs charging 20 times this and more for exotic variants.

Having gone through this process, if you end up with the bulk of your SMSF in a mix of ETFs, that wouldn’t ring any alarm bells for me. But it would depend on the mix of ETFs you use.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the What’s Possible? and Financial Autonomy podcasts. Questions to: [e-mail]

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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